Stocks: Sizing Up the Summer Slump

The adage said to sell in May, which would have been profitable. Now history tells us the markets dislike August

The performance of the Standard & Poor's index of 500 stocks was true to its recent form in July, as it declined 1.0%—marking the fifth decline in seven months and the seventh down month in the past nine. Concerns included dire expectations for second-quarter operating earnings, the near collapses of Fannie Mae (FNM) and Freddie Mac (FRE), and a 14.5% sell-off in energy stocks.

Five of the ten sectors in the S&P Composite 1500 Index posted advances on the month, with Financials, Health Care and Consumer Staples leading the way with gains in excess of 3%. Energy, Telecom Services, and Utilities fell from 6% to 14.5%, dragging down the entire S&P 1500 by 1.0%. The S&P MidCap 400 index slipped 2.0% on the month, while the S&P SmallCap 600 index gained 2.0%. The Nasdaq Composite Index was another positive performer, adding 1.4% for the month.

More than 45% of the 137 subindustries in the S&P 1500 posted declines for the month, with 16 falling by double digits. Commodity Chemicals, Coal & Consumable Fuels, Oil & Gas Exploration & Production, and Real Estate Management & Development each tumbled more than 20% in July. More than 90 subindustries advanced on the month, led by 20% jumps for Airlines, Education Services and Other Diversified Financial Services.

Historically, the S&P 500's general performance in the month of August since 1945 has been the 10th worst of all the months, posting an average price change of 0%. Since 1990, however, August's average 1.0% decline has been the worst of all months, followed by the average declines for February, June, and September. Now you know what we have to look forward to in this month—and next. Of course, history doesn't always repeat itself.

A maxim that pays

The old adage, "Sell in May and then walk away," recommends that investors take a break from stocks in May. It indicates that stock-price movements historically have been substantially stronger in the November-April period than in the May-October stretch. Indeed, since 1945, the S&P 500 gained an average of 6.8% from November through April, but only 1.6% from May through October. In addition, the November-April results beat the May-October performance 70% of the time.

Even though what worked in the past may no longer work in the future, investors would have been breathing a sigh of relief had they taken the old saying's advice this year, as the S&P 500 has fallen 8.5% since the beginning of May. Since the market's average 1.6% return from May through October is pretty much the same as you would have received from cash, market timers probably wouldn't have cashed out; they just would have braced for possible near-term disappointment. But since 1990, had an investor rotated into the more defensive Consumer Staples or Health Care sectors from May through October and back into the S&P 500 from November through April, he could have added an annual average of more than 300 basis points to the S&P 500's performance for the entire year.

So far this year the old adage has worked again. From April 30 through July 31, while the S&P 500 has fallen 8.5%, the S&P 500 Consumer Staples Index has fallen only 2.5%, while the S&P 500 Health Care Index has actually risen 1.7%. While we all know that past performance is no guarantee of future results, it's hard not to marvel at the old Wall Street sayings that have stood the test of time.

This year, not only would it have been smart in hindsight to have sold in May, but investors would also have benefited had they rotated into either the Consumer Staples or Health Care sector indices.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of subindustries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (7/31/08)
Biotechnology Genzyme GENZ 5 $77
Brewers Molson Coors TAP 5 $54
Coal & Consumable Fuels Peabody Energy BTU 4 $68
Fertilizers & Agr. Chem. Monsanto MON 5 $119
Gold Newmont Mining NEM 4 $48
HyperMarkets & Super Centers BJ's Wholesale BJ 4 $38
Industrial Gases Airgas ARG 5 $57
Life Sciences Tools & Services Covance CVD 5 $92
Oil & Gas Drilling Noble Corp. NE 5 $52
Oil & Gas Equip. & Svcs. Superior Energy SPN 5 $47
Oil & Gas E&P Swift Energy SFY 5 $51
Personal Products Estee Lauder EL 4 $44
Railroads Norfolk Southern NSC 4 $72
Steel Allegheny Technologies ATI 5 $47

Source: Standard & Poor's Equity Research

    Before it's here, it's on the Bloomberg Terminal.